Finance Director Expects Rebate to Be a Tax Credit

The state’s top budget official said Wednesday that Gov. George Deukmejian’s $700-million tax rebate proposal probably will take the form of a one-time-only personal income tax credit.

State Finance Director Jesse R. Huff, saying details are still being worked out, estimated that the proposed rebate would average $50 for individuals and $100 for married couples filing joint returns.

Even though there is opposition in the Democratic-controlled Legislature, Huff told reporters at a Capitol news conference that he hopes the rebate “can be enacted in time for taxpayers to see the benefit when they file their 1987 returns in the spring of next year.”

The finance director said the tax rebate would be financed from a portion of the $2.7-billion windfall in unexpected tax revenues announced by Deukmejian on Tuesday.

Huff, in releasing details of the governor’s updated budget proposal, said significant spending increases were being proposed for education, health and welfare, toxics enforcement, prisons and other programs.

The proposed spending would bump the governor’s budget proposal for the new fiscal year that begins July 1 from $39.3 billion to $40.8 billion.

The $700 million is earmarked for the tax rebate to keep the state from exceeding a spending limit approved by voters in 1979, Huff said.

Huff said the Administration favors a one-time income tax rebate or credit because of a belief that most of the surplus derives from a temporary rise in taxable income caused by federal tax law changes.

‘One-Time in Nature’

“We think a good portion of the reserve is one-time in nature,” said the finance director, explaining that tax receipts in April were up 40% from a year earlier with no fundamental change in the economy to explain the anomaly other than changes in federal tax law.

Huff said Californians were “buying and selling things like crazy in October, November and December” to take advantage of a change in the way the federal government taxes capital gains created by the sale of investments like real estate, stocks and bonds.

When taxpayers rushed to sell off profitable investments to take advantage of last year’s lower rates, they also created substantially more personal income for the state to tax, said Huff, Deukmejian’s cabinet-level budget adviser.

The rebate proposal faces substantial opposition from Democrats in the Legislature, who would like to see the $700 million spent on education and other programs.

Legislators dispute the interpretation of the spending limit given by the Administration. They believe that there is plenty of room under the limit to legally spend the money on education and other programs, largely because many local government entities, like school districts, are well below their own spending limits. The state simply could turn the money over to these local entities, the lawmakers argue.

Teacher Unrest Over Pay

Heating up the debate is the fact that the governor’s tax rebate plan comes against the backdrop of teacher unrest over low pay, complaints from educators that many students learn in overcrowded classrooms using outdated textbooks, and severe budget problems in many school districts.

Leaders of the Legislature’s two fiscal committees added their voices to opposition earlier expressed by Assembly Speaker Willie Brown (D-San Francisco) and Senate President Pro Tem David A. Roberti (D-Los Angeles).

Assemblyman John Vasconcellos (D-Santa Clara), chairman of the Assembly Ways and Means Committee, said there are many programs--such as those to combat AIDS, improve schools and beef up transportation--that need increased funding. The committee chairman said he would support a tax rebate only if he was satisfied the state’s other needs were being met.

“It’s not very satisfying if you have a few extra dollars in your pocket from a tax rebate but you are dead from AIDS, can’t get your children educated or don’t get to work because of gridlock,” Vasconcellos said.

Sen. Alfred E. Alquist (D-San Jose), chairman of the Senate Budget and Fiscal Review Committee, said, “You bet I oppose the rebate.”

‘Little Hard to Understand’

“The governor’s proposal is a little hard to understand when you look at all the needs of the state,” Alquist said.

Huff, during his news conference, argued that critics of the governor’s plan, particularly state Supt. of Public Instruction Bill Honig, were trying to circumvent the will of the voters by pushing proposals that allow them to go around the limit.

To combat that, the finance director said the governor will sponsor legislation aimed at bringing all government agencies in California up to the Constitutional spending limit.

Under the present law, each government agency in California has its own spending limit, which, like the state’s, is adjusted annually according to population growth and the rate of inflation.

Honig has been arguing that school districts around the state are $1 billion below the limit and thus could legally receive that much in additional state funding. The governor’s proposal would change the method by which the limits are calculated--in essence a bookkeeping change--so that individual districts would all be at their limits.

SPENDING THE STATE SURPLUS Gov. George Deukmejian has proposed tax rebates of between $42 and $60 per taxpayer because of a windfall of $2.7 billion in tax revenues anticipated over the next 14 months. Rebates would total about $700 million. And he would build state reserves to $1 billion. Here is how he would propose to spend the rest, in million of dollars:

Department 1986-87 1987-88 World Trade Commission -- $0.1 State Fire Marshal -- 1.0 Alcoholic Beverage Control -- 3.3 Water Resources Control Board -- 7.2 Health Services--Medi-Cal -- 33.9 Health Services -- 7.0 Health Services-Disengagement* -- -443.7 Prop. 65--Toxics Cleanup -- 6.7 Development Services (Aged, Blind, Disabled) -- -0.1 Mental Health $6.0 5.9 Social Services -- 42.3 Education (K-12) -- 217.4 State Teachers Retirement Fund -- -0.6 University of California -- 40.1 Hasting College of the Law -- 0.1 California State University -- 45.4 California Community College 9.0 99.5 Student Aid Commission -- 0.8 Special Supplenental Subventions 20.8 17.4 (Aid to local Redevelopment Agencies) Flood Relief (Reduction in Savings) 15.0 -- Commission on State Mandates -- 47.1 (Local Aid for State-Mandated Programs) Employee Compensation--Civil Service -- 46.2 Statewide--Restore 1% Reduction** -- 69.4 Expenditure Legislation 65.6 -36.9 Total Revisions $104.4 $209.5 Previously Acknowledged Deficiencies $410.1 $599.0 (Medi-Cal, Education, Welfare, Prisons) Previously Acknowledged Deficiencies $410.1 $599.0 TOTAL $514.5 $808.5

*Health programs to be assumed by counties. **Last December, Deukmejian cut 2% from state budget.